BY TIOL News Service

NEW DELHI, DEC 02, 2015: THE issue is: Whether the transaction of buy-back of shares of the target company and the price at which it was acquired warrants compulsory disclosure in the public announcement of further acquisition of shares in such company, when the buy-back had taken place within 26 weeks prior to the date of public announcement. YES is the answer.

Facts of the case

Mr. A.R. Dahiya (the Appellant) stepped into shoes of one Mr. V.P. Garg ('Garg') who defaulted to honour his buy back obligations pursuant to an agreement entered with Haryana State Industrial Development Corporation Limited (‘HSIDC'). Under the agreement , Mr. Garg was supposed to buyback the shares of HSIDC in the Polo Hotels Pvt Ltd, a company promoted by Mr. Garg. Since the Appellant was facing a stringent liquidity problem, he requested the payment for the buy-back to be made in monthly instalments through four post-dated cheques. HSIDC, accepted the request. Subsequently, the Appellant, Garg and HSIDC entered into a tripartite financial collaboration agreement, whereby HSIDC consented to the Appellant stepping into the shoes of Garg. Since the appellant was acquiring in excess of 15% of shares of the Target Company, a public announcement was made but neither in the public announcement nor in the letter of offer sent to the SEBI did the Appellant disclose the fact that he and his associates had already bought back the shares of HSIDC. The draft letter of offer was approved by the SEBI subject to certain changes.

The Appellant could acquire only 2.42% of the shares of the Target Company, as the shareholders were not willing to offer their shares at Rs.8.75 (price per share offered by the Appellant) when their face value was Rs.10/-. SEBI received a complaint from Mr. Komlam Sardana alleging that the Appellant had acquired three lac equity shares from HSIDC at the rate of Rs. 23.75 per share, whereas the shares were not offered at the same price to the existing shareholders. The complainant also brought to the notice of SEBI that the post-dated cheques through which the Appellant had tendered consideration had subsequently been dishonoured and criminal proceedings had been initiated against him. The Appellant moved an application stating that he was covered under the ambit of Regulation 3(1)(i), and as a result was immune to the provisions under Regulations 10, 11 and 12. SEBI sought a clarification from the merchant banker regarding the non-disclosure of the payment made by the Appellant through postdated cheques. The merchant banker informed SEBI that the Appellant had not informed him about said payment. Thereafter, SEBI directed the appellant to make a fresh public announcement for 20% shares to the shareholders of the Target Company at the price of Rs. 23.75 per share along with interest at the rate of 15% per annum. SEBI further directed the Appellant to pay the balance amount at the aforesaid rate to all the shareholders who had offered their shares in pursuance to the public announcement made. Aggrieved, the Appellant preferred an appeal before the SAT who rejected the contention of the Appellant that said amount had been deposited by way of comfort or security. Aggrieved by the decision of the Tribunal, the Appellant filed appeal before Supreme Court.

Decision

The SEBI's order was upheld.

Reasoning

1. Regulation 20(2)(b) provide that the highest price paid by an acquirer for any acquisition would be taken into consideration for determining the minimum offer price. As the Appellant had paid Rs.23.75 per share to HSIDC within the period of 26 weeks prior to the date of public announcement, this transaction had to be taken into consideration for determining the minimum offer price. This regulation apply irrespective of fact whether acquisition had actually taken place or not.

2. Exemption under Regulation 10 was only with respect to making a public announcement. The said exemption does not permit the Appellant from not disclosing the transaction for the purpose of calculating the minimum offer price.

3. SEBI relied on a letter issued by HSIDC to it dated 11.1.2001, wherein it was categorically mentioned that the cheques issued by the Appellant to HSIDC were consideration for the buy-back of the shareholding held by HSIDC in the Target Company.

4. The Appellant had vainly and incorrectly attempted to justify his act of non-disclosure by stating that the transaction with HSIDC was protected by Regulation 3, which placed it beyond the ambit of Regulation 10, 11 and 12. As Regulation 3 only protects a transaction between a co-promoter and a State financial institution to the extent that, as a consequence of such transaction a public announcement will not be required to be made as provided under Regulations 10, 11 and 12. However, it does not imply that the said transaction is to be protected from the rigours of other Regulations provided for under the Act. Thus, the transaction between the Appellant and HSIDC will have to be subject to Regulations 16 and 20, and the rate at which the Appellant bought back the shares from HSIDC had to be disclosed in the public announcement.

5. In our view, the post-dated cheques amounted to a promise to pay and that promise would be fulfilled on the date mentioned on the cheque. Subsequent dishonouring of the post-dated cheque would have no bearing on the case.

(See 2015-TIOL-289-SC-SEBI)